Speech by SEC Commissioner:
Opening Statement at the SEC Open Meeting: Item 3 — Whistleblower Program
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
November 3, 2010
We will consider a proposal to implement a whistleblower program as required by Section 924(a) of the Dodd-Frank Act.
Shortly after my arrival in early 2009, the SEC embarked on an effort to enhance its capacity to detect and prevent fraud.
We sought to make better use of the information we receive. We sought to get better information from those with knowledge of wrongdoing. And, we sought to use our own resources more wisely — by increasing our efficiency and exploiting technology.
But, recognizing that our own resources are limited, we also sought to find ways to leverage third parties.
One leveraging tool is an effective, reasonable whistleblower program that encourages people to come forward with evidence of serious securities law violations.
Whistleblowers can be a source of high quality leads. They can provide us with first-hand information about ongoing frauds that may otherwise not come to light. This type of information can be crucial to protecting investors or helping us return their funds.
Eight years ago, when passing Sarbanes-Oxley, Congress recognized the importance of whistleblowers in detecting fraud at public companies.
That Act made great strides in providing both protections for whistleblowers at public companies and in requiring companies to establish procedures for receiving confidential or anonymous complaints about accounting or auditing issues. These compliance procedures are important safeguards in helping protect our capital markets.
Through Dodd-Frank, Congress has expanded the protections available to whistleblowers beyond public issuers. And, it created substantial incentives for people with knowledge of fraud to come forward — not just with evidence of insider trading — as under the SEC’s old whistleblower program, but of any federal securities law violation.
The fact is we get thousands of tips every year. Yet, very few of these tips come from those close to the frauds as they are occurring. We hope that this new whistleblower program will change that.
Today, we are proposing for public comment, rules that define and outline the scope of the whistleblower program, set forth the procedures for applying for awards and the Commission’s procedures for making decisions on claims.
I expect that the combination of new protections and the SEC’s new whistleblower fund to reward valuable whistleblowers will enhance the SEC’s ability to enforce the securities laws and protect investors.
Today’s proposed rule maps out a simple, straightforward procedure for would-be whistleblowers to provide us critical information. And, it clearly conveys how would-be whistleblowers can qualify for an award through a transparent process that provides them a meaningful opportunity to assert their claim to an award.
That’s not to say that this rule doesn’t pose challenges. With the potential for substantial awards comes the possibility for unintended consequences.
The staff, mindful of these challenges, has considered and weighed a number of potentially competing interests that are presented in implementing the statute, and have proposed a rule that takes a common sense approach to interpreting the statute consistent with the Commission’s authority.
For example, the proposed rule seeks to reduce the chance that employees unnecessarily bypass internal compliance programs that their own companies may have established. This is an important issue as our goal is not to, in any way, reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the securities laws.
The proposed rule would also prevent individuals with certain legal obligations — such as lawyers, auditors and internal compliance personnel — from using their positions to reap rewards. And, the proposed rule would clarify that no award will be provided to people who mastermind the very crime they are reporting.
Further, the proposed rule would make clear that the statute’s whistleblower protections apply to anyone who provides us information about a potential securities law violation, regardless of whether it leads to a successful enforcement action.
Our goal is to create a reasonable, thoughtful and transparent program. For this reason, we very much want to hear from the public, from the whistleblower community, and from those in the compliance field and encourage you to submit public comments on the many questions we pose today.
Before I close, I’d like to recognize the very hard work of the staff. This proposal is extremely thoughtful and demonstrates an enormous amount of effort to address some very difficult policy choices in balancing the need to encourage whistleblowers to come forward without promoting unintended consequences. From day one, this effort has been a true partnership between the Division of Enforcement and the Office of General Counsel, and the support from the Division of Risk, Strategy and Financial Innovation has been extremely valuable as well.
I would like to thank the staff of the Division of Enforcement, specifically Rob Khuzami, Lorin Reisner, Adam Storch, David Bergers, Tom Sporkin, Lori Walsh, Sam Waldon, Jordan Thomas, Laurita Finch and Sarit Klein; and the Office of the General Counsel, specifically David Becker, Mark Cahn, Rich Levine, Brian Ochs, Stephen Jung and Brooks Shirey.
I would also like to thank the Division of Risk, Strategy, and Financial Innovation, specifically Adam Glass, Matt Reed and Alex Lee, for their contributions and collaborative efforts. Finally, I would like to thank the other Commissioners and all of our counsels for their collaborative work and comments, which greatly enhanced the proposed rule.
Now I’ll turn the meeting over to Rob Khuzami, Director of the Division of Enforcement, to hear more about the proposal.